A small increase in revenue. In 2023, H1, the company's operating income was 9.74 billion yuan, an increase of 0.6% over the same period last year, with a growth rate of + 16.8pcts over the same period last year. By business unit, the revenue of raw milk business was 1.08 billion yuan (including 1.06 billion yuan of sales between divisions), an increase of 7.2% over the same period last year, with a growth rate of-13.3 pcts; and the revenue of dairy products and nutritional supplements was 9.71 billion yuan, an increase of 2.0% over the same period last year, with a growth rate of + 19.4pcts.

The revenue of classic star flying sail products has declined, and the gross profit margin is under pressure. In 2023, H1, affected by changes in the company's product portfolio, the cost of sales increased by 7.6% year-on-year to 3.38 billion yuan. Due to the decline in revenue from Classic Star Flying Sail products, the company's gross profit fell 2.7% year-on-year to 6.36 billion yuan, and gross profit margin-2.3pcts to 65.3%. The company's sales expense rate is from + 3.0pcts to 35.5%, and the management expense rate is from + 1.0pcts to 7.8% year-on-year. The company's net profit fell 28.8% year-on-year to 1.62 billion yuan, and net interest rate-6.9pcts to 16.6% year-on-year. Year-on-year net profit fell 24.8 per cent to 1.7 billion yuan, while net interest rate fell-5.9pcts to 17.4 per cent.

The share of revenue generated by sales to offline dealers has declined. On June 30, 2023, the company mainly sold its products through an extensive distribution network of more than 2800 offline dealers across the country (covering more than 94000 retail outlets). In the six months ended June 30, 2023, revenue generated through sales to the company's offline distributors accounted for 77.8% of total revenue from dairy products, year-on-year-5.1pcts.

Investment suggestion: we estimate that the operating income of China Feihe Limited 2023, 2024, and 2025 is 226.9, 241.4, 25.64 billion yuan, respectively, + 6.5%, 6.4%, 6.2%, respectively, and the net profit attributable to shareholders is 51.5, 55.9, 5.96 billion yuan, and + 4.2%, 8.4%, 6.7% respectively. Maintain the "overweight" rating, with a target price of HK $5.58, corresponding to 9.0 times PE in 2023.

Risk tips: food safety events; the number of newborns is not as expected; the promotion of new products is not as expected.